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TMI Blog1986 (11) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... ied in the schedule to the said agreement as and when the assessee would intend to manufacture such size or sizes of machines. The know-how would be supplied within two months on receipt of the request in writing from the assessee. Payment would be made in the United Kingdom by a representative of the assessee against one set of documents and materials relating to the know-how in respect of each size of machine. All such documents and materials would be handed over by the British company to the assessee, but the same would remain the property of the British company. (2) The British company would grant to the assessee (i) a sole licence to make and sell the said machines within the manufacturing territories during the continuance of the agreement subject to the condition that during the period of the agreement, the assessee would appoint another company named in the agreement as the sole concessionaire for the sale in the manufacturing territory of the said machines made by the assessee under this agreement on the terms and conditions to be agreed between the assessee and the sole concessionaire (ii) a non-exclusive licence to sell the said machines within the selling territory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e year's previous notice in writing that this agreement would stand terminated on the expiry of the said period of 10 years, the same would continue in force thereafter unless terminated by either party giving to the other not less than one year's previous notice in writing or for such lesser period as the assessee might approve. (8) The agreement might be terminated forthwith by a party not in default giving to the party in default a notice in writing terminating the agreement on the ground of certain events as specified happening. (9) Up to termination of the agreement after the initial period of 10 years, the assessee would subject to the other terms and conditions as aforesaid be at liberty to use and continue to use the said know-how acquired in pursuance of the agreement for manufacture of the said machines without being liable to make any further payment to the British company. In the assessment year 1967-68, the accounting year ending on September 30, 1966, the assessee in terms of the aforesaid agreement paid a sum of Rs. 56,989 to the British company in respect of the technical know-how and debited the said amount in its accounts. In its assessment to income-tax in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... materials and the same was allowable as deduction. It was held by the Commissioner that the right to the technical know-how and designs vested in the assessee during the period of the agreement which was valid for 10 years, a long period, and the contract could be extended even after 10 years unless specifically terminated by either side. It was noted that in Ciba of India Ltd., the payment was made by the assessee to its foreign supplier for know-how periodically on the basis of sales, but under the agreement in the instant case, payment was being made once and for all, bringing into existence an asset of enduring benefit. The Commissioner held further that the assessee was not carrying on the business of manufacturing machine presses and, therefore, it could not be said that the payment was being made to the British company to obtain more profit from the existing business. It was held that the payment had been made to obtain technical know-how and design to start a new line of business in which the production started in 1969. The Commissioner came to the conclusion that the payment of the said Rs. 56,989 was capital in nature and that the Income-tax Officer had erred in allowi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argeable against the Revenue, would be a business expense. If there was no acquisition of any asset or advantage, the payment of a lump sum to avoid a business expense would not be a capital expense. The Tribunal noted that in the instant case, as in Ciba of India Ltd., there was no transfer of the benefits of research by the British company to the assessee once and for all. The British company remained the owner of all documents and materials supplied on account of know-how. The agreement further provided that the assessee would continue to use the said know-how after the initial period of 10 years only up to the termination of the said agreement though without further payment. This right was, however, subject to the other conditions of the agreement, viz., that the documents and materials supplied would remain the property of the British company. The Tribunal found further that the payment by the assessee, in any event, would not go beyond the period of the agreement and the character of the payment did not depend upon its periodicity or upon sales. The Tribunal found that the assessee did not acquire a new line of business but it took up the manufacture of new machines in its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ritish company in sterling and also royalty on sale of machines at a stipulated rate. Learned advocate for the Revenue submitted that the law has again been laid down by the Supreme Court in a decision subsequent to Ciba of India Ltd. [1968] 69 ITR 692, to the effect that the technical knowledge and know-how supplied by way of documents and records should be treated as " plant " in the hands of the recipient and as a capital asset and the latter would be entitled to claim depreciation in respect of the same. In support of his contentions, learned advocate for the Revenue cited the following decisions : (a) Ram Kumar Pharmaceutical Works v. CIT [1979] 119 ITR 33 (All). In this case, the assessee, carrying on business of manufacture and sale of saccharine, entered into an agreement with a German concern for obtaining, inter alia, know-how and data for construction and operation of a plant for manufacture of saccharine by a particular process. The assessee was required to pay a lump sum immediately on the conclusion of the agreement to the foreign supplier and in addition, a royalty of 2 1/2% on the sale value of the manufactured products for the next five years subject to a max ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ired by the assessee which was of an enduring nature. The decision of the Tribunal was upheld. (c) Scientific Engineering House P. Ltd. v. CIT [1986] 157 ITR 86 (SC). In this case, the assessee which manufactured scientific instruments and apparatus, entered into two separate collaboration agreements with a Hungarian company for manufacture of two different products, namely, theodolites and microscopes. The terms of the agreements were almost identical. Under the agreements, the foreign supplier in consideration of Rs. 80,000 to be paid by the assessee to it in each case, agreed to supply to the assessee all technical know-how required for the manufacture of the said products. The foreign supplier also agreed to render documentation service by supplying to the assessee an up to date and complete set of five types of documents including manufacturing drawings, processing documents, a list containing specifications of raw materials, layouts and know-how, assembly and casting drawings. The foreign supplier also agreed to give training and impart knowledge of the know-how technique of manufacture. The agreements were to remain in force for five years. The assessee paid the stipulated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o keep the technical know-how secret. Information about further improvements in the technical know-how was also agreed to be transferred to the assessee. In consideration of the transfer of such know-how, the assessee agreed to pay to the collaborating company a royalty at an agreed rate per ton of the new product manufactured. There was a subsequent agreement between the parties where it was made clear that there was no absolute transfer of technical know-how, but the ownership in respect of the same continued with the collaborating company. The assessee was only entitled to use such know-how for a period of five years on payment of the royalty as agreed. In its income-tax assessment, the assessee claimed deduction of the royalty paid to the collaborating company as revenue expenditure. The claim was disallowed by the Income-tax Officer but was allowed by the Appellate Assistant Commissioner. Thereafter, on further appeal, it was held by the Tribunal that the royalty paid in the first year would be treated as capital expenditure but the royalty to be paid in the subsequent years would be revenue expenditure. The matter came up on a reference before the Kerala High Court. On consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a new item of machine. It was submitted further that the assessee was entitled to utilise the foreign know-how only during the currency of the agreement and the property in the said know-how remained with the foreign supplier. The fact that in the instant case, the assessee made an initial payment of a lump sum and also agreed to pay royalty on the sales made no difference to the position. It was to be considered what benefit the assessee was obtaining as a result of the aforesaid payments. In support of his contentions, learned advocate for the assessee cited the following decisions : (a) CIT v. Hindusthan General Electrical Corporation Ltd. [1971] 81 ITR 243 (Cal), In this case, the assessee under an agreement with a foreign company obtained certain rights to manufacture and sell in India products of designs and trade names belonging to the foreign company. The agreement provided that the assessee would pay to the foreign company costs of preparing and providing prints, designs, drawings, specifications, instructions and other information and for supply of patterns and tools. The assessee further agreed to pay to the foreign company a royalty on the products manufactured by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see claimed deduction of the said amount. The Income-tax Officer held that the information and knowledge obtained was of an enduring nature and, therefore, the expenditure was capital in nature and not allowable as a deduction. On appeal, it was held by the Tribunal that the expenditure was of a revenue nature and that the assessee was entitled to deduction of the same. On a reference, a Division Bench of this court upheld the decision of the Tribunal by following the decision of the Supreme Court in Ciba of India Ltd. [1968] 69 ITR 692 and of this court in Hindusthan General Electrical Corporation Ltd. [1971] 81 ITR 243. It was held that the expenditure was in the nature of revenue expenditure and allowable. This court noted that the period of agreement was for a fairly long period, viz., 10 years certain, and thereafter terminable on notice. It was held that the period was fixed by the agreement and the assessee merely had the use of the licence for a limited period of time for certain limited purpose. It was noted that under the agreement, no new machinery was acquired or installed and it was held that the assessee did not obtain any asset or right of an enduring nature but only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce. Under the agreement, the foreign supplier was required to supply to the assessee, engineering and manufacturing information in current use for manufacture of the items concerned including calculations designs, data, drawings, processes and specifications. The foreign company was also required to supply information relating to the designs and specifications in respect of manufacturing equipments, tools, fixtures, etc. The assessee was required to sell the manufactured products as licensed by the foreign company. In terms of the agreement, the assessee paid Rs. 2,39,084 to the foreign company in three instalments between 1962 and 1964. The question was whether deduction of the said amount paid was allowable as a revenue expenditure. On these facts, the Tribunal held that the said amount spent was a capital expenditure as the payment was not recurrent or dependent upon the sales. It was noted that the licence was for a period of 10 years renewable for a further period of 5 years and was an exclusive licence. The object of the agreement was to obtain the benefit of technical assistance and not merely running the business. On a reference, it was held by a Division Bench of the De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement is for a certain period of 10 years and thereafter might be terminated by the parties subject to the condition that on certain contingencies, the agreement can be terminated forthwith. It has been found as a fact by the Tribunal that under the agreement, the assessee had not acquired or started a new line of business. The assessee was already manufacturing machines and, under the agreement, would utilise its existing business unit for the purpose of manufacturing new items. Under the agreement, there is no out and out transfer of the foreign know-how to the assessee and the know-how supplied by the foreign company remains the property of the foreign company for all times to come. The assessee has only user of the know-how during the currency of the said agreement. The distinction sought to be made that in Ciba of India Ltd. [1968] 69 ITR 692, the payment by the assessee was periodic and on account of royalty and in the instant case, the payment is in a lump sum is of little consequence. As laid down by the decisions noted earlier, what is required to be decided is, whether the assessee by a payment, whether in a lump sum or periodical, was obtaining any enduring benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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